Plans to publish beneficial ownership information and establish a corporate-role holder identifier

On 22 March 2022, Right Honourable David Clark (Minister of Commerce and Consumer Affairs) announced the Government’s proposal to introduce a new beneficial ownership register for limited partnerships and companies.  The Ministry of Business, Innovation and Employment (MBIE) also published Cabinet’s decision to create a unique identifier for directors of companies, general partners of limited partnerships, and beneficial owners of these entities.

This news alert will primarily focus on the first proposal to make information about beneficial owners of limited partnerships and companies transparent.  For limited partnerships, we particularly focus on how these changes will apply for investors in private equity and venture capital funds.

Relevant cabinet papers, minutes, and regulatory impact statements on the two proposals can be found on MBIE’s website here.

Who should read this?

Limited partnerships, companies; and beneficial owners, directors of general partners, limited partnerships, and companies should consider these proposals given the significant changes involved.

Background

In June 2018, MBIE released discussion documents for public feedback on two initiatives to support the integrity of the corporate governance system – increasing the transparency of beneficial ownership and introducing a director identification number.  Submissions closed on these consultations on 3 August 2018.

Subsequently, the Financial Action Task Force (FATF)’s Mutual Evaluation Review of New Zealand in 2021 (read our alert on it here, and our insights here) highlighted that New Zealand lacked transparency of beneficial ownership information, that it was a key deficiency in New Zealand’s AML/CFT framework, and stated it as a top priority action under the report.

After considering submissions received in 2018, MBIE shared advice with ministers and Cabinet, and policy decisions supporting the initiatives were made in December 2021.  We summarise these below.

In accordance with Cabinet’s decisions, amendments will be required to the Companies Act 1993 (Companies Act) and the Limited Partnerships Act 2008 (LP Act).  MBIE expects a draft Bill containing the proposed amendments will be made available for public consultation around mid-2022 and anticipates that the finalised Bill will be introduced to Parliament in late 2022.

Proposal one: Transparency of information on beneficial owners

Cabinet agreed that companies and limited partnerships should be required to provide to the Registrar of Companies (Registrar), who is responsible for the administration of both companies and limited partnerships, information about their beneficial owners.  This proposal is aimed at, among other things, reducing the use of these corporate structures for illicit purposes, supporting work to counter foreign interference, and aligning with international standards.

A modified definition of “beneficial owner” is proposed to be used for the Companies Act and LP Act, focussing on persons who have “significant control” over a company or limited partnership.  Specifically, Cabinet has recommended “beneficial owner” to capture individuals who:

  • hold, directly or indirectly, a minimum percentage ownership interest in a company or limited partnership, to be prescribed by regulations;
  • hold, directly or indirectly, a minimum percentage of the voting rights in a company or limited partnership, to be prescribed by regulations;
  • have the right, directly or indirectly, to appoint or remove a majority of the board of directors of a company or general partners of a limited partnership;
  • have the right to exercise, or actually exercise, significant influence or control over a company or limited partnership;
  • have the right to exercise, or actually exercise, significant influence or control over the activities of a trust or other organisation which is not a legal entity, but would itself satisfy any of the above conditions if it were an individual.

Some of the information on beneficial owners, directors and general partners is proposed to be made publicly available on the companies and limited partnerships register – full legal name, date of and basis for becoming a beneficial owner or date of appointment, address for service, and chains of beneficial ownership.  Other sensitive details such as the date of birth, email address, and corporate information of other entities the person is a beneficial owner of, will be on a non-public corporate role-holder register.  However, government agencies and AML reporting entities may be able to access other information (e.g., residential address, phone number, nationality/countries of residence) under certain conditions.

This will be a major departure from the long-standing ability for persons such as limited partners of a NZ limited partnership to remain private and increases ongoing compliance in respect of such information for relevant entities and the beneficial owners.  But even for companies, while ultimate holding companies are currently disclosed, to publicly identify beneficial owners (which can include minority stakeholders) is a significant additional step.

Officials in the Regulatory Impact Statement actually recommended that beneficial owner information be held on a private internal database within the Companies Office, but Cabinet decided that having some information publicly accessible would be a better balance between the broader public interest in light of international trends and supporting law enforcement, versus privacy concerns.

Companies and limited partnerships will be expected to take reasonable steps to ascertain who their beneficial owners are and provide key identifying information about the beneficial owner to the Registrar.  To support these entities, shareholders and limited partners will also have obligations to ascertain whether they are a beneficial owner and if they are, to inform and provide all relevant information to their respective entity.

Listed issuers will be exempted from these requirements if they are already subject to equal or more stringent public disclosure requirements. Cabinet has also agreed that beneficial owners should have the ability to request that public information about them be suppressed on the respective registers if they have safety or welfare concerns.

Proposal two: Unique identifiers for directors, general partners, and beneficial owners

Cabinet agreed that the Companies Office should establish a unique ‘corporate role-holder identifier’ (CRI) for individuals who are or become directors of companies, general partners of limited partnerships, or are aware or ought reasonably to be aware they are or have become a beneficial owner of either of these entities.

It is a similar proposition to the way New Zealand Business Numbers have been issued to New Zealand entities.  Being able to identify if someone holds or has held these roles for more than one entity can make it easier for businesses, creditors and consumers to undertake due diligence, and for enforcement agencies to detect potential unlawful activities.

The proposal requires individuals who apply for a CRI to provide biographic information (e.g., date of birth) and contact information (email address). Both the relevant entities and individuals concerned will have ongoing maintenance obligations.  Individuals who have been issued a CRI will, when they are associated with one or more companies or limited partnerships, be responsible for keeping the Registrar up-to-date at least once a year on information collected.  Similarly, the relevant entities will also be responsible to keep the Registrar up-to-date at least once a year on the individuals who have or should have a CRI and with whom they are associated.

Cabinet also agreed that:

  • a director, general partner or shareholder can require suppression of their residential address from the registers if they can provide an address for service, and, for a fee, can require the Registrar to suppress their residential address from historical documents uploaded if they can demonstrate specific safety concerns;
  • creditors, insolvency practitioners, shareholders, and classes of entities to be prescribed in regulations should have the right to request the residential address of a specific director or general partner where they have been unable to reach the person using their address for service in relation to a matter about that person’s statutory role or duties; and
  • company director and shareholder and general partner consent forms no longer need to be sent to the Registrar and instead the relevant company keep them available for inspection when required.

Officials in the relevant Regulatory Impact Statement generally supported the establishment of a CRI and this proposal.

The changes under proposal two naturally link with proposal one and may be  a way to also create efficiencies from a maintenance perspective (i.e., not having to update details on the register one by one for companies/limited partnerships the person may be involved in) and the usefulness of information available.  We expect there will likely be practical administrative changes to the Companies Office interface to support the implementation of these measures which may also amend the steps to incorporate or register the relevant entities.

Our view

Government’s timing of the announcement is no doubt influenced by the imposition of urgent sanctions against Russia (see our alert on the Russia Sanctions Act here, sanctions on Russian individuals and entities here, and impacts on financial institutions here).  However, it will have much wider application.

While New Zealand committed to looking at these proposed measures over five years ago at an anti-corruption summit in London, it has become more urgent now with the Government prioritising certain national security matters and protecting New Zealanders from illegal activities, which the changes to the rules around beneficial owners are expected to do. The FATF Mutual Evaluation Review of New Zealand referred to above highlights the international expectations New Zealand is now responding to.

It is important that New Zealand plays its part, and is seen to do so, and to that extent we support the initiative. The most contentious feature is not the collection and notification to the Registrar of beneficial ownership information, but the requirement to display it publicly. For example, to date, information about limited partners, although collected and filed, is not publicly available. This is proposed to change under the new rules, although much will depend upon the percentage thresholds finally determined and how they are to be applied.  Significant cornerstone investors may meet the threshold for publication as beneficial owners, where smaller investors do not.

In the short term, these measures may see New Zealand being viewed as a less attractive domicile for prospective investors to do business in.  However, in the long term, these requirements should not inhibit flows into New Zealand as they are aligned with existing international standards.  Also, some of the proposed changes actually help with the privacy of individuals’ information (e.g., directors not displaying their residential addresses on the Companies Office, and some information of directors, shareholders, general partners and beneficial owners only being accessible under certain circumstances).

The relevant Regulatory Impact Statement mentions that as at October 2021, there were approximately 3,300 registered limited partnerships and 693,000 registered companies in New Zealand.

While “beneficial owner” is a key concept under the Anti-Money Laundering and Countering Financial of Terrorism Act 2009 (AML/CFT Act), Cabinet proposes to use a modified definition of “beneficial owner” for the Companies Act and LP Act with the current statutory review of the AML/CFT Act being undertaken by the Ministry of Justice (see our alert here).

The relevant Regulatory Impact Statement also states that MBIE officials “do not anticipate a precise alignment” between the two “beneficial owner” definitions, particularly as the proposed measures specifically target how beneficial ownership works in a limited partnership or company structure and it being used in a specific context under the AML/CFT Act. If the definition is not to be aligned, it may substantially undermine, and makes us question, the value of making beneficial ownership public on the relevant registers.  The registers may be weak as a form of verification for AML/CFT reporting entities who are conducting customer due diligence, in accordance with the AML/CFT Act, in relation to information declared to it by beneficial owners.

The proposals to make beneficial ownership public will need careful consideration in the context of investment fund vehicles, particularly as they will apply to limited partnerships and therefore most private equity and venture capital structures, as to whether it would be sufficient for that information to be filed with the Registrar and available on request for good reason.

Finally, we note that the legislation to give effect to the changes could well be a vehicle to address what has long been a safety concern for directors of New Zealand companies. Unlike many countries the New Zealand requires directors to state publicly their residential address, rather than it only being available on application to the Registrar. At a time when the name and address of the owner of a motor vehicle is not public it seems anomalous that one can track down the home address of all of the directors of the 693,000 registered companies in New Zealand (as at October 2021) just by looking up the Companies Office register. Hopefully, Parliament will entertain those submissions at the time of enactment of the required legislation.

We look forward to reviewing the draft bill when it is published and encourage limited partnerships and companies to look out for these developments.

This article was co-authored by Shaanil Senarath-Dassanayake, a solicitor in our Financial Services team.

What next?

For the proposed changes to take effect legislation will need to be enacted through Parliament.

A legislative bid for a “Corporate Governance (Transparency and Integrity) Reform Bill” will made in 2022.  We expect this will be taken forward promptly given Cabinet has agreed it to have a legislative priority of 4 (i.e., to be referred to a Select Committee in the year).  The Select Committee stage is when members of the public have the opportunity to make submissions on proposals in the relevant Bill.  After hearing submissions, the Select Committee will work through the issues raised, and decide what changes, if any, should be made to the Bill before it progresses to the Second Reading stage.

If you have any questions in relation to these proposals or would like to know how the proposals may affect your business, please contact one of our experts.

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